In the world of mergers and acquisitions, the border between Canada and the United States is virtually invisible, with M&A activity between the two countries fuelled by economic, political and geographical drivers. Canada is a relatively appealing source of target companies for U.S. businesses because of its physical proximity, cultural and regulatory similarities, minimal geopolitical risk and wealth of natural resources. At the same time, Canadian companies seeking to be global players—or otherwise grow significantly—naturally look for acquisition opportunities in the much larger U.S. market.
This guide focuses on cross-border transactions structured as takeover bids in Canada or tender offers in the United States. Takeover bids and tender offers involve an acquiror making an offer to target shareholders to acquire some or all of their shares. In a hostile situation, a takeover bid or tender offer is the only way to acquire a Canadian or U.S. target company. In a friendly situation, many variables will influence if this is the best way to acquire a target, compared with a merger (in the United States) or an amalgamation or plan of arrangement (in Canada). The most appropriate form of transaction will often become apparent during planning or negotiations and will depend on how quickly the acquiror wants to gain control of the target, the tax implications of the transaction, the available methods of financing the transaction, regulatory hurdles such as antitrust review, among other factors.
This guide provides a side-by-side review of the Canadian and U.S. legal regimes governing takeover bids and tender offers to help acquirors and targets prepare for a cross-border bid. The general principles underlying Canadian and U.S. takeover laws are the same, as are the practical effects of many specific rules of each jurisdiction. Both legal regimes are designed to provide fair and even-handed treatment of target shareholders by ensuring that they are all offered the same consideration and given full disclosure of all material information pertaining to a bid. A secondary objective of both legal regimes is to provide a predictable set of rules and a level playing field for potential bidders, targets and other capital markets participants.
Generally speaking, takeover bids for Canadian targets must comply with Canadian law and tender offers for U.S. targets must comply with U.S. law. The regulatory situation may be more complicated, however, if a target has a significant number of shareholders in both jurisdictions. In those cases, a bid may have to comply simultaneously with both the Canadian and U.S. legal regimes.
Regulatory Differences at a Glance
Despite many similarities between Canadian and U.S. legal regimes, the details and terminology of some of the legal requirements differ. These are some of the main differences:
- The Canadian takeover rules are triggered when an acquiror crosses a brightline 20% threshold ownership of a class of shares in a target company. U.S. tender offer rules are triggered by widespread solicitation of public shareholders combined with other qualitative factors, and open market purchases are not generally considered to be tender offers.
- Prospectus-level disclosure is required in both jurisdictions if a bidder offers shares as consideration; under the U.S. rules, this disclosure may be subject to intensive review by the U.S. Securities and Exchange Commission, which could significantly affect the timing of the transaction.
- Canada's early warning rules require a toehold position to be disclosed when the acquiror's ownership exceeds 10%—and following this disclosure, further purchases must be halted until one business day after the necessary regulatory filings are made. The U.S. early warning rules require a toehold position to be disclosed when the acquiror's ownership exceeds 5%.
- The minimum tender condition for a bid, which will reflect the applicable corporate law requirements for a second-step squeeze-out merger in the target's jurisdiction of incorporation, is typically 662⁄3% for Canadian targets or a majority of the target's shares for U.S. targets.
- If a bidder does not reach a 90% ownership level in a bid for a Canadian target, a second-step shareholders' meeting to approve the transaction will be required, whereas in a bid for a U.S. target incorporated in Delaware, a secondstep shareholders' meeting would not be required as long as the bidder reaches majority ownership and certain other requirements are met.
- Stronger and more effective takeover defences have historically been permitted under the U.S. regime, meaning that Canadian companies have been somewhat easier targets for unsolicited bids, although this difference is becoming less pronounced as a result of various developments on both sides of the border.
- Under the Competition Act, Canadian pre-merger notification requirements will be triggered by a bid for more than 20% of the target's voting shares and the assets or revenues of the merging parties exceed certain thresholds; the premerger notification requirements under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976 may be triggered by the acquisition of a certain dollar value of securities, regardless of the percentage of target securities acquired.
- In Canada, foreign investment by a non-Canadian may be subject to national security or economic "net benefit" reviews under the Investment Canada Act. In the United States, foreign investments by non-Americans may be subject to review on national security or other defence-related grounds.
Parties in cross-border transactions must determine whether both Canadian and U.S. takeover rules will apply or whether an exemption is available from some or all of one country's requirements. In cases of dual regulation where no exemption is available, the parties will have to quickly become familiar with both sets of laws and comply with the stricter requirements. Parts 2 to 8 of this guide provide an overview of both Canadian and U.S. takeover rules for cross-border transactions. In part 9, this guide describes the various exemptions that may be available, depending on the circumstances, to allow the parties to avoid dual regulation. Thorough preparation and planning will enable all parties to effectively navigate any applicable requirements and structure and execute their cross-border transactions as smoothly and efficiently as possible.
2. THE LAY OF THE LAND
Triggering the Canadian and U.S. Legal Regimes
Target Shareholders in Canada
Takeover bids in Canada are governed by the corporate law of the jurisdiction in which the target is located and securities laws of each province and territory where shareholders are located.1 For example, Ontario laws will apply if a takeover bid is made to Ontario shareholders of a target company. If a bid is also made to shareholders in other provinces or territories, as would typically be the case, it will be subject to the securities laws of those jurisdictions. In describing Canadian legal requirements, this guide focuses on the requirements under Ontario corporate and securities laws, which are largely harmonized with those of the other provinces and territories.
The Ontario takeover bid rules are triggered when an acquiror (with any joint actors) crosses a threshold of 20% ownership of a class of a target's outstanding equity or voting securities. If the rules are triggered by a purchase of the target's shares, the acquiror must make the same offer to all of the target's shareholders by sending them a formal takeover bid circular, unless an exemption is available.
In measuring its ownership of the target's securities, an acquiror must include securities that it beneficially owns or exercises control or direction over. Any securities that an acquiror has the right to acquire within 60 days, such as options, warrants or convertible securities, are deemed to be beneficially owned by the acquiror. The holdings of any other party that is acting jointly or in concert with the acquiror must also be included.
Under Ontario law, whether a person or entity is "acting jointly or in concert" with the bidder will generally depend on the facts and circumstances, subject to the following:
- a parent or subsidiary is deemed to be acting jointly or in concert with a bidder, as is any party that acquires or offers to acquire securities with the bidder; and
- certain other parties, including major shareholders and anyone exercising voting rights with the bidder, are presumed to be acting jointly or in concert with the bidder, although the presumption can be rebutted on the basis of the facts and circumstances.
There are several exemptions from Ontario's takeover bid rules. Private agreements to purchase securities from not more than five persons are exempt. If there is a published market for the target's securities, the price under this exemption may not exceed 115% of the market price. Normal-course purchases of up to 5% of a class of a target's securities during any 12-month period are also exempt. The price paid for securities under this exemption may not be greater than the market price of the securities on the date of acquisition. These two exemptions are relied on frequently, particularly by institutional purchasers such as private equity and hedge funds.
Target Shareholders in the United States
Tender offers in the United States are governed by U.S. federal securities laws and related rules of the Securities and Exchange Commission (SEC), as well as by the corporate laws of the target's jurisdiction of incorporation. In describing U.S. corporate legal requirements, this guide focuses on the corporate laws of Delaware because a significant number of U.S. companies are incorporated there.
The U.S. tender offer rules generally apply when the target's equity securities are listed on a U.S. stock exchange or widely held, meaning that they are registered with the SEC under the Securities Exchange Act of 1934 (Exchange Act). The U.S. antifraud provisions and certain rules pertaining to the fairness of the transaction apply to all U.S. tender offers.
Instead of a bright-line quantitative test equivalent to Canada's 20% threshold, an eight-factor qualitative test is applied to determine whether a transaction triggers the U.S. tender offer rules. Each of the following eight factors is relevant, but not individually determinative:
- The bidder makes an active and widespread solicitation of public shareholders.
- The solicitation is for a substantial percentage of the target's stock.
- The offer is at a premium above the prevailing market price.
- The terms are firm rather than negotiable.
- The offer is contingent on the tender of a fixed minimum number of shares.
- The offer is open for a limited period of time.
- Shareholders are subject to pressure from the bidder to sell their stock.
- The bidder publicly announces an intention to gain control of the target, and then rapidly accumulates stock.
The consequences of triggering the U.S. tender offer rules are essentially the same as the consequences of triggering the Canadian rules: the acquiror must make the same offer to all target shareholders by way of formal documentation mailed to shareholders and filed with securities regulators.
Some transactions may simultaneously trigger the Canadian takeover bid rules and the U.S. tender offer rules. A bid for the shares of a Canadian company that has a significant number of U.S. shareholders could trigger both countries' rules unless an exemption is available to grant relief from the U.S. rules. Conversely, a tender offer for the shares of a U.S. company that has a significant number of Canadian shareholders could trigger both countries' rules unless an exemption is available to grant relief from the Canadian rules. Where the two legal regimes impose different requirements, a transaction that is subject to both regimes will have to comply with the more stringent rules or otherwise seek exemptive relief from the applicable regulatory authority.
Canadian and U.S. securities regulators have adopted cross-border exemptions so that a takeover offer may proceed primarily under the laws where the target is organized, even if the target has shareholders residing in both jurisdictions. If a cross-border exemption is available, the parties to a transaction will save time and avoid duplicative regulation. A tender offer for the shares of a U.S. target company with less than 40% of its shareholders residing in Canada will usually be exempt from most of the Canadian rules, and a takeover bid for the shares of a Canadian target company with less than 40% of its shareholders residing in the United States will usually be exempt from most of the U.S. rules. These cross-border exemptions from regulation are discussed in greater detail in part 9, "Avoiding Dual Regulation: Cross-Border Exemptions," p.55.
Under Canadian and U.S. law, acquirors' and targets' public communications about a bid, whether oral or written, are heavily regulated and subject to liability to private plaintiffs and securities regulators. Substantial due diligence is usually required to help ensure that the parties' disclosure to the market and in filings with securities regulators is accurate and not misleading.
Alternatives to a Bid
There are advantages and disadvantages to takeover bids and tender offers when compared with alternative ways of acquiring a target. The best form of transaction will often become apparent in the planning or negotiating phase, depending on a myriad of factors, including the speed with which the acquiror wants to gain control of the target, the tax implications of different structures, the available methods of financing the transaction, potential regulatory hurdles such as antitrust review, and the target's receptiveness to an acquisition.
In a friendly deal in Canada, a takeover bid may offer a slight timing advantage to obtain control of a target because the target's board may voluntarily shorten to as little as 35 days the minimum bid period of 105 days that would otherwise apply. In the U.S., a tender offer is the fastest way to obtain control of a target. In both jurisdictions, a takeover bid or tender offer is the only way to acquire a hostile target because the offer is made directly to the target's shareholders, thereby bypassing its management and directors. However, if an acquiror is unable to obtain a minimum threshold of the target's shares in a takeover bid or tender offer, a second-step shareholders' meeting to vote on squeezing out the non-tendering shareholders will be required. This could eliminate any timing advantage of friendly takeover bids and tender offers, as compared to single-step mergers, in obtaining full ownership of the target. Notably, under Delaware law, a second-step shareholders' meeting to approve the transaction may not be required if the bidder obtains majority ownership in the target following the tender offer. A tender offer, therefore, will likely be the fastest way for an acquiror to obtain 100% ownership of a Delaware target.
In Canada, amalgamations and plans of arrangement are the main alternatives to takeover bids. Both of these options require a target shareholders' meeting and supermajority approval of the transaction by 662⁄3% of the votes cast at the meeting. A single-step merger in the United States is equivalent to an amalgamation in Canada. A merger generally requires approval by a majority of the outstanding shares of the target and is the primary alternative to a tender offer.
A plan of arrangement is a very flexible way to acquire a Canadian company. This method requires court approval following a hearing and although this may provide a forum for disgruntled stakeholders to air their grievances, a plan of arrangement allows the parties to deal with complex tax issues, amend the terms of securities (such as convertibles, exchangeables, warrants or debentures) and assign different rights to different holders of securities.
Plans of arrangement also provide acquirors with greater flexibility than takeover bids to deal with the target's outstanding stock options—for example, if the option plans do not include appropriate change-of-control provisions for accelerated vesting or termination. If an acquiror is offering securities to target shareholders as consideration, plans of arrangement have the added benefit of being eligible for an exemption from the associated SEC registration and disclosure requirements.
Takeover bids and tender offers may be more difficult to finance than other kinds of transactions. If the bidder does not obtain sufficient tenders to complete a compulsory or short-form second-step merger to acquire any untendered shares, the acquiror may find it difficult to secure financing. By contrast, in the case of a merger or amalgamation, assuming the requisite shareholder vote is obtained, the acquiror can immediately secure the financing with a lien on the target's assets, since the acquiror will own 100% of the target at the time it needs to pay the target's shareholders.
In Canada, amalgamations and plans of arrangement are permitted to be subject to a financing condition, whereas takeover bids are not; however, the target's board will generally insist on financing being in place for a plan of arrangement (financing conditions are discussed further in the section "Conditions" in part 4, "The Rules of the Road," p.26).
Friendly Versus Unsolicited Transactions
A key variable in structuring any takeover bid or tender offer is whether the transaction is friendly or unsolicited. Although unsolicited transactions often result in a change of control, the initial unsolicited bidder is often not the successful party. In an unsolicited transaction, the highest price usually wins. In addition to the risk of failure associated with unsolicited deals, friendly transactions have historically been more desirable for the following reasons:
- In unsolicited transactions for a Canadian target, the target has a relatively long period of time (105 days) to evaluate and respond to an unsolicited takeover bid. The 105-day period increases deal uncertainty for an unsolicited bidder, exposing it, for example, to interloper risk.
- In unsolicited transactions, the target will actively solicit competing transactions and take other actions to thwart the bid, such as attempting to negatively influence the granting of regulatory approvals, initiating litigation and taking other defensive measures that make unsolicited transactions more complicated and potentially more expensive.
- A friendly acquiror can obtain access to confidential information for due diligence purposes, whereas in an unsolicited situation, access will not be granted unless necessary for the target's board to fulfill its fiduciary duties to target shareholders.
- A friendly acquiror can obtain a "no shop" covenant, which prevents a target from soliciting competing offers (subject to a "fiduciary out") so that only serious third-party bidders are likely to interfere with the transaction.
- A friendly acquiror may have the benefit of a break fee, expense reimbursement and the right to match competing bids (as the quid pro quo for the fiduciary out).
- To be successful, an unsolicited bidder may have to indirectly pay the break fee as well as the purchase price if the target has already agreed to a friendly transaction with a third party.
- Friendly transactions allow greater flexibility to structure a transaction to meet tax and other regulatory objectives.
- Friendly transactions avoid acrimony and preserve relationships.
Despite the advantages of friendly deals, it is sometimes necessary for a bidder to bypass an unwilling target board. The advantages of unsolicited offers for acquirors include the following:
- In an unsolicited transaction, the acquiror determines the initial bid price and the time of launching the transaction without having to negotiate with the target, whereas in a friendly deal, the target's board will likely seek a higher price as a condition of making a favourable recommendation to target shareholders.
- An unsolicited transaction may avoid certain difficult management issues associated with mergers of equals, such as who will be CEO and how the board will be constituted.
- In an unsolicited transaction, there is less risk of rumours circulating in the market during negotiations, causing a run-up in the target's stock price and potentially making the deal more expensive.
The term "going-private transaction" is generally used to refer to an acquisition of a public company's outstanding securities by a related party, such as an existing significant shareholder, members of management or an acquiror in which an existing shareholder or management will have an interest. Because the acquiror is a related party of the issuer and public shareholders are being "squeezed out" of their equity interest, going-private transactions involve inherent conflicts of interest and inequalities of information. To protect public shareholders in these circumstances, both Canadian and U.S. laws prescribe heightened legal requirements when a takeover bid or tender offer is also a going-private transaction. These rules are set forth primarily in Multilateral Instrument 61-101, Protection of Minority Securityholders in Special Transactions, in Ontario and Québec, and Rule 13e-3 under the U.S. Exchange Act.
For a takeover bid, MI 61-101 generally requires
- a formal, independent valuation of the target's shares, which must be supervised by an independent committee of the target's board; and
- heightened disclosure, including disclosure of the background to the bid and any other valuations prepared or offers received for the target's securities in the past two years.
A bidder will also be required to obtain minority shareholder approval of a secondstep transaction if it wants to acquire full ownership of the target, as will usually be the case; the bidder may, however, count shares tendered to its bid toward that approval if certain conditions are satisfied (see part 5, "Second-Step Transactions," p.29).2
Like MI 61-101, Rule 13e-3 under the U.S. Exchange Act also imposes heightened disclosure requirements for going-private transactions.3 Detailed information is required about the target board's decision-making process, the rationale and purpose of the transaction, the alternatives considered by the board and other offers received for the target's securities during the past two years. The board must also explain the reason why the transaction is considered fair to target shareholders, and must provide supporting information such as prior appraisals or opinions, as well as informal materials like presentations to the board by investment bankers.
In contrast to MI 61-101, no formal valuation is required under Rule 13e-3. However, the target's board will typically form a special committee to review the transaction and will also request a financial adviser to provide a fairness opinion to support the board's exercise of its fiduciary duties (see part 6, "The Target's Board of Directors," p.33). Moreover, these transactions are reviewed by the SEC.
In the context of private equity buyouts of public companies, the heightened legal requirements applicable to going-private transactions give rise to timing and process considerations. If a going-private transaction provides management with a significant equity interest following the closing of the transaction (as is often the case if the acquiror is a private equity firm), minority approval and a formal valuation may be required under MI 61-101. Furthermore, under U.S. rules, the acquiror and not just the target could become subject to the heightened disclosure obligations of Rule 13e-3 and be required to provide, among other things, information about the fairness of the transaction and plans for the target.
The factual circumstances that could trigger the going-private rules are very similar in Canada and the United States, but subtle differences in the legal tests could result in one jurisdiction's rules being triggered but not the other's. Companies should seek advice at an early stage about a transaction's potential to trigger the goingprivate rules and strategies that can be used to avoid triggering them inadvertently.
To continue reading this article, please click here
1 In the case of non-corporate entities such as income trusts, the constating documents (e.g., the declaration of trust), as well as principles of trust law, will be applicable rather than corporate law. This guide focuses on the laws governing corporate entities; the principles governing other entities are substantially similar.
2 For a going-private transaction structured as an amalgamation or plan of arrangement, MI 61-101 similarly requires approval by a majority of the minority shareholders.
3 Rule 13e-3 applies only when the target's securities are listed on a U.S. stock exchange or otherwise registered with the SEC. Furthermore, an exemption is available if the number of securities held by U.S. holders is relatively small.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.